IF IT IS TOO GOOD TO BE TRUE - LESSONS FROM MADOFF AND MR. PONZI

Over my over thirty years as a complex litigator I have, unfortunately, had the opportunity to represent individuals and classes of investors who have been the victims of Ponzi schemes.  In the early days of my practice, a large Ponzi scheme involved the loss of, say, a $100 million.  Today's schemes, like the Madoff debacle, make those look like drops in the ocean.  Yet, the impact is still the same just on a larger scale, with many if not most investors' lives destroyed.  Having seen the impact of the first Ponzi scheme that I was hired to proscecute on the civil side, it does not take long to conclude that Ponzi operators can cause more death and suffering that a group of serial killers.

The modus operandi also is eerily similar - the perpetrator creates a special aura about himself and his investment scheme [this is not intended to be sexist but from my experience most Ponzi operators have been men] and then finds the right marks to prey upon.  The bigger the scheme the more elaborate is the marketing aperatus - with the perpetrator enlisting the aid of various third parties, be they broker-dealers, financial advisors or other intermediaries [who are always well compensated].  The basic theme is also the same - the perpetrator has some special insight that allows him to create better than market returns.  Why?  Because, in the absence of better than market returns, there is no reason to invest.

As a result, these investments always have another common denominator - they are too good to be true.  Regardless of whether the investors knew that they were investing with Madoff or whether they were totally ignorant of who he was because they had invested through an intermediary, there was one common theme that ran throughout their investments - they were making better than market returns both in up and down markets.

This runs head on into the one simple rule that I have gleaned over the years of representing investors injured by Ponzi schemes and the one rule that would have stood a good chance of their avoiding being defrauded in the first place - if an investment is too good to be true it ain't true.

I was once being hired by a large institutional client who had been defrauded in a large securities offering.  They had done their due diligence and were still the victim of the fraud.  Nothing they could do in that situation other than hire me to pursue the defrauders.  Our meeting occurred around the time that Enron had hit the fan.  So I asked why they weren't hiring me for Enron.  They smiled and said that, unlike most other institutional investors, they had not invested a single cent in Enron.  Why?  Because, even though the stock was a darling of Wall Street, and everyone else was juicing up their portfolios with it, they never understood how Enron made its money, and thus they took a pass on investing in its securities.

A simple rule that all investors should follow - if you don't understand how the investment works don't invest.

Easy to say in hindsight but it is the one lesson that must be taught.  I know.  About four years ago, an acquaintance of mine asked me if I wanted to invest a six figure amount with a Connecticut brokerage who had a deal that would quintuple my money in five years.  The lure was strong.  But I disciplined myself and followed my rule.  My acquaintance didn't.  I have not had the temerity to ask whether he has quintupled his money or was the victim of Madoff or some other scheme.  But the odds are that he was.

I am not an investment advisor.  I am one of those who comes in to try to recoup loses after the frauds have been committed.  But I have learned, over these thirty years, that the same thing that makes a good complex litigator makes a good investment.  Simplicity and clarity.  You must not fall prey to your greed and you must not let others prey upon it.  There are no easy ways to make money. 

Comments

[davidwr]

There is a saying:

The only way to make money fast is to work in a currency plant.

[john]

Simply Awesome. Thanks. "if you don't understand how the investment works don't invest." This make me to read entire post. Superb. Keep up the good work.

[Forex Trading]

I think this is a very valuable lesson! You always must understand what you are getting in to, and how it works especially when there are big amounts of money involved.

[UGG Sale]

The modus operandi also is eerily similar - the perpetrator creates a special aura about himself and his investment scheme [this is not intended to be sexist but from my experience most Ponzi operators have been men] and then finds the right marks to prey upon. The bigger the scheme the more elaborate is the marketing aperatus - with the perpetrator enlisting the aid of various third parties, be they broker-dealers, financial advisors or other intermediaries [who are always well compensated]. The basic theme is also the same - the perpetrator has some special insight that allows him to create better than market returns. Why? Because, in the absence of better than market returns, there is no reason to invest.

[poker francais]

Thanks for the lessons, buddy) Smart enough to follow